Decoding Fintech Laws in India

The credit demand in India is projected for a steep rise to $1.41 Tn by 2022. Moreover, the growth rate in credit demand is estimated to be 3.73% between FY17 and FY22.

Given the bright prospects of the future, numerous tech companies are making their way into the market. The result is multiple synergies between fintech startups and established financial institutions and banks.

Fintech Rules and Regulations

There is no single universal regulatory body for Fintech entities functioning in India. The regulatory body governing particular verticals would regulate those specific entities based on the product or service offered by a financial entity. Fintech products and services mostly fall under the purview of the following regulators:

• the RBI;
• the Securities Exchange Board of India (SEBI);
• the Ministry of Electronics and Information Technology (MEITY);
• the Ministry of Corporate Affairs; and
• the Insurance Regulatory and Development Authority of India (IRDAI).

Payment Banks

A payments bank is a financial entity that functions as a bank but operates on a much smaller scale and cannot advance loans or issue credit cards to its customers.

According to the guidelines of licensing of Payment Banks issued by the RBI, it promotes further financial inclusion by facilitating small savings accounts and remittance services to low-income households, migrant labour workforce, small businesses, and other unorganised sector entities, etc.

Operating Guidelines for Payments Banks were issued considering the differentiated nature of business and financial inclusion focus of these banks on October 6, 2016. RBI rules dictate that all payment banks in India must have a minimum paid-up equity capital of INR 1 billion. A minimum 3% leverage ratio must be maintained, i.e., the outside liability of a payment bank should not exceed 33.3% of its net worth. RBI also states that if the promoter entity of a payment bank desires to engage in financial and nonfinancial transactions, these activities should not be mixed up with the banking business of the payment banks.

UPI and BHIM

The NPCI is an RBI and the Indian Banks’ Association initiative for creating a robust payment and settlement infrastructure in India. UPI and BHIM have been developed under the NPCI.

Unified Payments Interface (“UPI”) system empowers multiple bank accounts through a single mobile application. It merges several banking features, seamless fund routing & merchant payments into one. It also schedules and pays “Peer to Peer” requests as per requirement and convenience. Bharat Interface for Money or BHIM is a payment application that aids quick transactions using UPI. It facilities direct bank payments to anyone on UPI using the payee’s UPI ID. Although only banks can integrate UPI into their online portals or mobile applications for their customers, some of them tie-up with non-banking institutions for the provision of technology or design or operation of UPI powered payments.

Regulatory Sandboxes

As new-age technological innovations disrupted the traditional finance sector, the Reserve Bank of India (RBI) released its final guidelines for a regulatory sandbox for fintech firms in August 2019.

‘Regulatory sandboxes’ as a concept give regulators a chance to work with fintech innovators. They give regulators a chance to mitigate all potential risks and develop evidence-based policy. For Fintechs, this means an opportunity to test new products, services, or business models with their esteemed customers in a ‘live’ environment, which is subject to certain safeguards and constant oversight. In reality, RBI’s regulatory sandbox is a pledge towards a more agile environment and to absorb some of the disruptions.

Ban on Sharing of Borrower’s Credit Information with Fintechs 

RBI also instructed banks and NBFCs to stop sharing sensitive borrower data like credit information from CICs with unregulated financial entities on October 16, 2019.

There have always been laws to protect a customer’s privacy, as stated in the Credit Information Companies (Regulation) Act (CICRA) itself. The data sharing done by the unregulated entities without the consent of consumers is unlawful by nature. The business models of most lending companies rely heavily on credit bureau reports to access an individual’s credit history. The present letter was a sort of update for NBFCs, who often disregarded customer data privacy norms to generate more business.

Most legacy institutions and NBFCs strive to make partnerships with Fintech startups. They desire innovative technology to expand its customer base through targeted marketing and product development efforts. Failure to perform credit assessments for the leads will adversely affect the number of qualified inquiries banks and NBFCs associate with them.

About Finezza

Finezza is a complete lending lifecycle management software that offers an animated solution to the problems faced by Fintechs, in accordance with the regulations surrounding them. It not only facilitates functionalities like Credit Bureau Data Analysis by accessing the CIC data on behalf of an entity, but it also uses advanced algorithms to analyse the data by running the credit rules of the principal lending entity. Fintechs can conduct customised credit analysis thanks to Finezza by integrating data from several credit scoring bureaus.

To know more, get in touch with their team today!